The FCA emerged triumphant in this appeal and the outcome has altered the fortunes of persons regulated by the City watchdog. Reversing the Court of Appeal’s judgment, the Supreme Court held by majority that Mr Achilles Macris (M) had not been identified in the Final Notice given to JPMorgan Chase (JPMC). Accordingly, any “third party rights” under section 393 of the Financial Services and Markets Act 2000 (FSMA) were not engaged because the notice did not identify M when interpreted by information readily available in the public domain. Lord Sumption found the analogy with the law of defamation to be unhelpful. Lord Mance said that this was “a difficult case” and Lord Neuberger said it was “difficult to resolve” the meaning of the word “identifies” in section 393(1)(a) despite the provision being a “good example” of Parliament’s enactment of generally lucid statutory language. Lord Wilson entered a note of dissent and he would have dismissed the FCA’s appeal. In 2012, the Synthetic Credit Portfolio (SCP) operated by JPMC had lost $6.2bn because of the rogue “London Whale” trades. Because of the notorious losses the Final Notice entailed a financial penalty or “conduct costs” of £137.6m. Between 2012-2016 the world’s 20 foremost international banks paid a total of £264.03bn in conduct costs of which JPMC’s share was £33.64bn. As the head of the Chief Investment Office, which managed excess deposits including the portfolio comprising the SCP’s traded credit instruments, M’s functions as JPMC’s employee were “controlled functions” under section 59 of FSMA.

The losses were linked to high risk trading tactics, feeble management and failing to react to information alerting JPMC to the SCP’s problems. The appeal, explained Lord Sumption, turned on the meaning of “identifies” and on the meaning of the notice to which that word is being applied. The section 393 procedure aims to enable identified third parties, such as M, working in financial services firms to make representations to the regulator and take the matter to the Upper Tribunal (UT). Persons not party to regulatory settlement but discredited in enforcement notices are protected from unfair prejudice via the mechanism in section 393. A copy notice must be served to the third party but M was not given one. M had not been identified by name or job title but only as “CIO London management”. M argued that since he had already been identified by name in a US Senate Committee report on the SCP’s losses, the FCA notices enabled anyone to deduce the identity of the person known as “CIO London management”. M was not a party to the FCA’s settlement with JPMC. He was separately fined £762,900. Read the rest of this entry »

The ailing LIBOR benchmark, underpinning $500-$800 trillion worth of financial contracts, has been in a state of malaise for many years. Despite the efforts of regulators to revive the sick scandal-ridden benchmark, which suffered from a series of problems related to cheating and misreporting, it is unsurprising that its slow death will finally come in about four years’ time. As the Chief Executive of the FCA Andrew Bailey recently explained the funeral is set for 2021. But some clearly want LIBOR to live longer. Bailey called LIBOR “a public good” but questioned its current usefulness. Among other things, LIBOR related misconduct resulted in civil claims and fines of £9 billion. And, of course, in the criminal context it resulted in “clustered criminality” of which convicted LIBOR rigger Tom Hayes is a prime example. Clustered criminality, which only reflects a very small part of the ills affecting financial services, is when there “is at least strong suspicion that a crime has been committed and although the culprits may not be immediately clear it seems likely that more than one person was involved.” A succinct account of bankers lying, cheating and colluding to rig LIBOR is found in The Fix where Liam Vaughan and Gavin Finch expose the ills gripping the financial world. Hayes, who operated as “Tommy Chocolate” in the midst of the financial crisis, worked in a culture where “your performance metric” is all about “the edge” and making “a bit more money” because that is “how you are judged”.

In The Spider Network, David Enrich tells the “wild story” of Hayes – who he dubs “a maths genius” – and the backstabbing banking mafia which operated a thoroughly crooked financial system. Breaking the silence in an exclusive interview with The Sunday Times, Hayes’s wife Sarah Tighe vowed to “never stop fighting for my autistic husband, the LIBOR fall guy”. Hayes, who achieved notoriety by miraculously dodging extradition to the US, was jailed for 14 years for fraud but his sentence was reduced to 11 years. Tighe is fighting for her husband’s release and said that she “went apeshit” when officials tried to seize her assets as well. Her morale will undoubtedly be strengthened by the news that former Rabobank traders Anthony Allen and Anthony Conti, who are both British and were convicted at first instance for rigging LIBOR, have had their convictions overturned by the US Court of Appeals for the Second Circuit in New York which found that constitutional rights against self-incrimination had been breached. Tom and Sarah will probably also find solace in the fact that the cycle of cheating was so extreme that even the Bank of England is now implicated in LIBOR manipulation. Read the rest of this entry »

Almost like the British public on Brexit, the Supreme Court remained closely divided on the issue of whether the Court of Appeal erred in its construction of the terms of enhanced capital notes (ECNs) by relying on technical and specialist information as part of the factual matrix. Formally described as ECNs, the loan notes were contingent convertible securities (or “Cocos”). Lord Neuberger (with whom Lord Mance and Lord Toulson agreed) dismissed BNY Mellon’s appeal whereas Lord Sumption (with whom Lord Clarke agreed) would have done otherwise. As Lord Sumption said in his brief note of dissent, the case was “of considerable financial importance to the parties” but it raised “no questions of wider legal significance”. The outcome in the case is a major blow for investors (receiving up to 16pc interest) who had hoped that the court would not have held that the terms of the bonds (or ECNs) allowed Lloyds Banking Group (LBG) to redeem them early at face value. The High Court found in favour of the bondholders but the Court of Appeal reversed that decision, one that the Supreme Court has upheld: albeit not without doubts and dissent. Led by Mark Taber, the bondholders disputed that the ECNs had been disqualified as capital and resorted to litigation. A disgruntled Taber said that the division between the justices “raises massive issues over the role of the regulators”.

He is particularly aggrieved that the court’s judgment does not engage with the arguments aired about statutory requirements that bond prospectuses must be accurate and provide crystal clear information to investors so that they may make informed choices and decisions. Worse still Taber also complains that he lobbied the FCA’s new boss Andrew Bailey to make germane information – about the exact scope of the regulator and LBG’s knowledge about impending changes to capital requirements when the ECNs were issued – available to the court. But since his request was not granted, he argues that because the courts are not willing to intervene it must be the City regulator’s job to interpret the prospectuses. “I believe the changes they knew about, which were not disclosed in the ECN prospectus, meant that a capital disqualification event was a certainty at the time the ECNs were issued. If the court had been told this I think it would have made a difference,” is how Taber expressed his frustration with the situation. However, his claim appears to directly contradict even Lord Sumption’s dissenting judgment that despite its financial importance the appeal contained no legally significant questions of wider importance. Read the rest of this entry »

The Financial Conduct Authority is in the news a lot these days. Andrew Bailey has been handpicked to head the agency but the chancellor George Osborne has come under fire for making the appointment without conducting a formal interview, thereby sidestepping the two candidates (Tracey McDermott and Greg Medcraft from Down Under) formally on the shortlist. However, the beleaguered FCA chairman John Griffith-Jones agreed with outgoing chief executive McDermott and both of them were “happy” with the chancellor’s appointment of Bailey – a beefy looking BoE insider who impressively holds a doctorate in economic history. As seen in the last post, Panama has been in the news a lot. The FCA had originally given 20 banks until 15 April 2016 to report on the extent, if any, of their involvement and links with Mossack Fonseca or firms serviced by them. But now it warns that prosecutions over the Panama Papers are not clear-cut. According to Mark Steward, head of enforcement, the media frenzy is “quite different from prosecutions – the two don’t necessarily go together”. This case involved a Panamanian corporation called Asset LI Inc trading as Asset Land Investment plc against which the FCA brought proceedings for carrying on “regulated activities” without authorisation contrary to the general prohibition in section 19 of the Financial Services and Markets Act 2000. Schemes for investing in land with development potential are commonly known as “land banks” and the operation of such initiatives first came into the regulatory perimeter under section 11 of the PERG Manual of the FCA Handbook.

In Financial Services Authority v Fradley[2005] EWCA Civ 1183, the Court of Appeal had described the drafting of section 235 (collective investment schemes) of FSMA as “open-textured” by virtue of which words such as “arrangements” and “property of any description” are to be given “a wide meaning”. Arden LJ found in Fradley that section 235 must not be construed so as to include matters which are not fairly within it because contravening section 19 may result in the commission of criminal offences, subject to section 23(3) of FSMA. Lord Carnwath of Notting Hill found her Ladyship’s approach to be “helpful guidance”. On the other hand, he remained cautious of drawing analogies from comparative Commonwealth legislation presented to the court – such as the Australian Corporations Act 2001 – on the ground that differences in drafting warranted keeping the discussion strictly within the boundaries of UK statutes and authorities. Like the first instance judge, the Supreme Court referred to the English and the Panamanian company indiscriminately as “Asset Land”. Read the rest of this entry »

As infamously explained by jailed fraudster Tom Hayes, UBS must be credited with issuing a “handbook” on rigging LIBOR. Doubling Hayes up, in the ongoing LIBOR trial, Jonathan Mathew, one of five charged Barclays traders, says that he was merely following orders and just did what his boss taught/told him to do. The five men say everyone in the big banks “knew LIBOR was rigged”. As seen in an earlier post, along with Barclays traders, Deutsche Bank traders are facing criminal charges for EURIBOR manipulation and proceedings are ongoing in the case of R v Christian Bittar & Ors – first appearances were made at Westminster Magistrates’ Court on 11 January 2016 and a mention hearing was held on 18 March 2016. Former Deutsche trader Martyn Dodgson has also been convicted for insider trading in Operation Tabernula. In the instant case, echoing Templeman LJ in W T Ramsay Ltd v Inland Revenue Comrs [1979] 1 WLR 974, Lord Reed described UBS and Deutsche Bank’s behaviour as “the most sophisticated attempts of the Houdini taxpayer to escape from the manacles of tax.” The banks, which Lord King calls “the Achilles heel of capitalism”, may be disappointed with the Supreme Court’s ruling but most people will only be too delighted that top executives should become acquainted with some degree of retributive justice. The dry issue of tax is a hot political topic these days and the Panama Papers (see here) culminated in calls for the prime minister to resign for being a hypocrite.

Though this post is about the Supreme Court’s judgment, I use the opportunity to discursively expose other important tax issues reported in the media. Of course, Deutsche Bank announced last October that it would axe 9,000 full-time jobs and it has just recent lost its global position as a top-three investment bank. Research from Coalition, that ranks global investment banks by total revenue from fees and trading, shows that Citigroup and Bank of America are ahead of Deutsche Bank. JPMorgan Chase and Goldman Sachs retained their positions in first and second place respectively. Tim Wallace writes in today’sThe Sunday Telegraph that once a cash cow, investment banking is now is serious crisis and jobs and pay across the sector has declined. It is a vicious cycle and the following insightful analogy is invoked “shrinking an investment bank is hard. It is like unravelling a jumper – once you start pulling on the thread it is hard to stop … then all of a sudden, you haven’t got a jumper at all.” Read the rest of this entry »

Reposted from the Conduct Costs Pakistan Blog which I have recently started. As measured by the CCP Research Foundation, in the aftermath of the collapse of Lehman Brothers seven years ago, global “conduct costs” are approaching stratospheric levels and are presently estimated to be $300 billion. But none of the data reflected in the final sum can be traced to Pakistan – a market economy whose legal system closely resembles the English legal system, despite the politically retrograde Islamisation of the 1980s – in clear and unambiguous terms. This blog is written with the ambition of articulating a conduct costs’ model in Pakistan, a developing country which is in need of such analysis so that its 192 million people are put in a position to make informed choices about banking and financial services.

In constitutional terms, a sound basis for the study of conduct costs can be found in Articles 37 and 38 of the Constitution of Pakistan 1973. Laid down in Part II: Fundamental Rights and Principles of Policy, Chapter 2: Principles of Policy of the Constitution, Article 37 requires the state to promote social justice and Article 38 imposes on the state a duty to promote the people’s social and economic well-being. On an alternative level, in The End of Alchemy, Professor Mervyn King relies on all his experience as a central banker to explain the wider dynamics of the global economy. He invites us to embrace the underlying theoretical argument that banks are “the Achilles heel of capitalism”. This attractive proposition is as advantageous a place to begin a study of the banks in Pakistan as it is in the west. Read the rest of this entry »

Read as updated SSRN paper with reference to the Panama Papers. Because of the Budget 2016, the chancellor has been accused of “looking more like Gordon Brown as a purveyor of gimmicks.” In difficult times when calls for his scalp over the row regarding the budget seemed to have eclipsed everything else, the rare bit of good news for George Osborne is that he can use the opportunity provided by the threat of Brexit – “a leap in the dark” which may cost the UK £100 billion or 5 per cent of GDP and 950,000 jobs by 2020 – to camouflage and obfuscate the real problems of conduct in the world of economics and finance. On the other hand, in an important interview with Charles Moore the former Bank of England governor Mervyn King showed hallmark signs of euroscepticism and said the people need to make up their own minds about the upcoming referendum. King also warned that lenders have not stopped taking excessive risks with savers’ money and the result is “bankers have not learnt the lessons of the Great Crash”. Unsurprisingly, in his somewhat controversial new book The End of Alchemy he makes the case against financial sorcery by arguing that it must be squeezed out of the world’s banking system. Perhaps, such failings are amplified further because “financial crises are a fact of life” and we are “moving into a rerun of the credit crunch”. Indeed, Lord King calls banks “the Achilles heel of capitalism.”

Below I sketch important/emerging issues in the intersecting themes of economics, law and misconduct as seen in the media, especially through the lens of “conduct costs” – some other themes are also explored. Mentioning Walter Bagehot and his classic text Lombard Street, which argued that the BoE should provide short-term financial support in times of crisis, King advises us that the old “lender of last resort” model (LOLR) is in need of revision because “banking has changed almost out of recognition since Bagehot’s time.” The former governor argues that the time has come to replace LOLR with the pawnbroker for all seasons (PFAS) system. For him, it is time for financial institutions to drop LOLR and embrace PFAS and be prepared to advance funds to just about anyone who has sufficient collateral. “The essential problem with the traditional LOLR,” argues King “is that in the presence of alchemy, the only way to provide sufficient liquidity in a crisis is to lend against bad collateral – at inadequate haircuts and low or zero penalty rates.” Read the rest of this entry »

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